Proposition 13 and the Roots of California's Budgetary Problems

To understand why the woes of California's economy threaten the nation's, we must understand the state's road to insolvency. The Age of Reagan did not commence with the Great Communicator's inauguration in 1981. For its real beginning, we need to go back to June 1978, when Californians went to the polls and enacted Proposition 13.

By passing Howard Jarvis's malign initiative, California voters reduced the Golden State to baser metal. Under Republican Gov. Earl Warren and Democratic Gov. Pat Brown, California epitomized the postwar American dream. Its public schools, from kindergarten through Berkeley and UCLA, were the nation's finest; its roads and aqueducts the most efficient at moving cars and water -- the state's lifeblood -- to their destinations. All this was funded by some of the nation's highest taxes, which fell in good measure on the state's flourishing banks and corporations.

Amid the inflation of the late 1970s, however, the California model began to crumple. As incomes and property values rose, Sacramento's tax revenue soared -- but the parsimonious Democratic governor, Jerry Brown, neither spent those funds nor rebated them. With the state sitting on a $5 billion surplus, frustrated Californians grumped to the polls and passed Proposition 13, which rolled back and then froze property taxes -- effectively destroying the funding base of local governments and school districts, which thereafter depended largely on Sacramento for their revenue. Ranked fifth among the states in per-pupil spending during the 1950s and '60s, California sank to Mississippi-like levels -- the mid-40s -- by the 1990s.

Since 1978, state and local government in California has been funded chiefly by personal income taxes. Bank and corporation taxes have been steadily reduced. In the current recession, with state unemployment at 11 percent, tax revenue has fallen off a cliff.

But the problem with Proposition 13 wasn't merely that it reduced revenue. It also made it very difficult to increase revenue. Raising taxes now requires a two-thirds vote of the legislature, though in 47 other states a simple majority suffices. California has become overwhelmingly Democratic in the past two decades, but Republicans have managed to retain footholds -- representing just over one-third of the districts -- in both houses of the legislature.

The conservative backlash of 1978 also swept into the legislature a new, proto-Reaganistic generation of Republicans, who dubbed themselves "the Neanderthals." Compared to today's GOP state legislators, though, the Neanderthals look like Diderot's Encyclopedists. The current Republican crop has refused in good times as well as bad to raise business or other taxes (increasing the tobacco tax, for instance, has failed each of the past 14 times it has come up for a vote). Abetted by little local Limbaughs who inflame Republican brains, they protest that the state already has the nation's highest taxes. In fact, California ranks 18th among the states in percentage of personal income paid to state government, and its presumably beleaguered wealthiest 1 percent, according to Citizens for Tax Justice, pays just 7.4 percent of their income to the state, while the poorest Californians pay 10.2 percent.

But the myth of soak-the-rich high taxation persists among Republicans -- so much so that the GOP front-runner to succeed Arnold Schwarzenegger in next year's gubernatorial election, former eBay CEO Meg Whitman, is calling for cuts in business tax rates even though the state is staring at a $21 billion deficit that it somehow has to close. In short order, unless the federal government steps in with a bridge loan, the state will throw 940,000 poor children off its health-care rolls and lay off tens of thousands of teachers.

Because California is so much larger than any other state, and its unemployment rate among the nation's highest, the collapse of its capacity to spend will counteract some of the effect of the federal stimulus and retard the nation's recovery -- much as its aerospace slump retarded the recovery of the mid-1990s. The Obama administration ignores California's plight at its own -- and the nation's -- peril. The nation's banks are stuck with so much bad paper from California mortgages gone awry that a huge contraction in state spending would make their assets even more toxic. In the short term, the only way to avoid a further downturn may be a federal loan to the state.

A more permanent, homegrown solution to California's woes (and it may take a state constitutional convention to get it) would require the state to eliminate the two-thirds threshold for enacting taxes, to repeal Proposition 13's freeze on the value of commercial properties (some of which are still assessed at their 1978 levels) and to end the process of ballot-box budgeting through the initiative process, which is now more dominated by monied interests than the legislature ever was. In Washington, the Age of Reagan may have shuddered to an inglorious end, but we also need action from state governments -- and Sacramento in particular -- to move us toward a more sustainable economic future.